UPDATE 2-Canada housing starts fall less than expected in Sept.

(Recasts lead, adds analyst comment)

By Andrea Hopkins

TORONTO, Oct 9 (Reuters) - Canadian housing starts slowed inSeptember on declines in the apartment and condo market, but thefall was not as sharp as expected, Canada Mortgage and HousingCorp data showed on Tuesday.

Analysts said the market will likely cool further.

Housing starts fell to a seasonally adjusted annualized rateof 220,215 units in September. That was down from 225,328 unitsin August but still well above forecasts for a drop to 207,500,according to a Reuters poll of analysts.

The August figure was revised up from 224,900 units reportedpreviously.

"Canadian housing starts continue to run at an elevatedpace, but momentum cooled somewhat in September and for all ofQ3," BMO Financial Group economist Robert Kavcic wrote in a noteto clients. "The gradual cooling will likely persist given thesales slowdown currently taking place in a number of majormarkets."

The CMHC said September's slowdown in starts was mostly dueto a decrease in the urban multiples market -- typically condosand apartment buildings.

"As expected, the number of multiples starts in Ontario,particularly in Toronto, reverted back to a level more in linewith the average pace of activity over the last six months,"said Mathieu Laberge, deputy chief economist at CMHC.

"Following a period of elevated housing starts activity dueto strong volumes of multi-family unit pre-sales in 2010 and2011, the pace of housing starts is expected to moderate," headded.

A long run-up in Canadian house prices and a condominiumbuilding boom in Toronto and Vancouver have sparked some concernof a housing bubble. The International Monetary Fund on Mondaysingled out Canada's housing boom as a factor to watch.

The government tightened mortgage lending rules in July tomake it harder for homebuyers to take on too much debt, and theSeptember housing-starts data is just the latest signal that themarket has begun to cool despite continued low interest rates.

"In our view, Canada still has overbuilding concerns. Thelevel of household formation does not support the level ofconstruction activity that we are seeing each month," FrancisFong, an economist with TD Economics, said in a research note.

"However, given the lower-for-longer interest environment inwhich we currently find ourselves, we anticipate a slowmoderation in both new sales and construction activity towardstheir long-term trend levels over the next few years," he said.

The rate of urban starts fell by 3 percent to 203,731 unitsin September, driven by a slowdown in Ontario's hot condosector. National single starts fell 1.4 percent to 67,643 andmultiple starts fell 3.9 percent to 136,088 units, according tothe CMHC report.

Urban starts rose in the Atlantic region, Quebec and thePrairies, but fell in Ontario and British Columbia, the twoprovinces that have had the most overheated housing markets inthe past several years.

Scotia Capital economists Derek Holt and Dov Zigler, in aresearch note, said multiple housing starts have returned totheir pre-crisis peaks.

"As inventories stockpile, investor demand wanes and newprojects are pulled, condominium starts are poised to softeninto next year and this will play the greatest role in drivingcooler housing markets."

(Reporting By Andrea Hopkins; Editing by Jeffrey Hodgson andLeslie Adler)

((Andrea.Hopkins@thomsonreuters.com)(416 941 8159))